Council bonds to fund works: report

Local councils will be able to finance infrastructure investment through bonds raised by a national financing authority and will be helped to make better investment decisions, if key recommendations of a federal government report to be released today are followed.

Local Government Minister
Simon Crean
will meet councils from across the country in Canberra today at the National General Assembly of Local Government, where he will release the review into local government infrastructure by consultants Ernst & Young.

The report, commissioned by the federal government last year and prepared by Darrin Grimsey, a senior partner in infrastructure Advisory at Ernst & Young, makes 13 recommendations to improve the way councils plan, finance and deliver infrastructure investments.

These include adopting a national financing authority, such as those in Sweden and New Zealand, which would invest directly in council projects.

The authority would bundle approved council borrowings into bond issues, underwritten by the federal government, which could be sold to private investors.

“The key to opening up local infrastructure to institutional finance lies in using the apparatus of higher tiers of government to create the scale of borrowing that can bring risk-sensitive investors to the table," the report says.

Local governments, which have very low levels of gearing, have plenty of scope to take on more debt, it adds.

It also recommends a national advisory body that would provide skills and oversight into projects, as well as procurement policies.

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“Institutional investors currently have little appetite for financing local infrastructure projects," the report says.

This is in part because of “a lack of confidence in councils having the skills and capabilities to efficiently deliver complex infrastructure."

Council projects are dominated by roads, which account for 61 per cent of $301 billion of assets.

Although other projects can be substantial, they tend to be one-off, so individual councils do not develop strong planning, asset management and procurement skills, the report says.

Mr Crean said he would respond to the report’s recommendations after consulting state and territory governments, the Australian Local Government Association, state local government associations and the network of 55 Regional Development Australia committees.

But Mr Crean acknowledged there was a need for change.

“We know there’s been a concerted effort on behalf of councils to improve their financial and asset management processes," he said.

“The key is to also keep building capability, and the review recommends extending existing programs of training in these areas."

Mr Crean recognised the need for greater collaboration between governments and the private sector.

“Governments have a key role to play because there is a public benefit – but the private sector also has a role to play," he said.

The third key recommendation is for the federal government to change laws so that councils can borrow against their forecast rates increases.

This would involve local councils forecasting the increases in rates and taxes resulting from an infrastructure development.

They could then borrow against this future income by finding investors that would make a lump-sum payment in return for the right to receive long-term cash flows, such as a bond.

The federal government would examine the development of potential trial projects, particularly in clean energy, Mr Crean said.